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A company, in common parlance, means a group of persons associated together for the
attainment of a common end, social or economic. Registered or Incorporated companies are
those companies incorporated under the Companies Act, 1956 or some other Companies Act.
Companies incorporated under the Companies Act, 1956 are mostly business companies but they
may also be formed for promoting art, chart, research, religion, commerce, or any other useful
purpose.
Definition of a Company
A voluntary association of people A company, in broad sense, may mean an association of
individuals formed for some common purpose. It has capital divisible into parts, known as
shares. At the same time it is an artificial person created by a process of law. It has a perpetual
succession and a common seal. It exists only in contemplation of law, i.e., it is regarded by the
law as a person.
An artificial person A company has no body, no soul and no conscience nor is it subject to
imbecilities of the body. It is not visible, save to the eye of the law. These physical disabilities
make a company an artificial person. But then a company really exists and it is not a fictitious
entity.
Characteristics of a Company
1. Separate legal entity
A company is in law regarded as an entity separate from its members. In other words, it has an
independent corporate existence. Any of its members can enter into contracts with it in the same
manner as any other individual can and he cannot be held liable for the acts of the company even
if he holds virtually the entire share capital. The companys money and property belong to the
company and not to the shareholders (although the shareholders own the company).
2. Limited liability
A company may be a company limited by shares or a company limited by guarantee. In a
company limited by shares, the liability of members is limited to the unpaid value of the shares.
For example, if the face value of a share in a company is Rs 10 and a member has already paid
Rs 7 per share, he can be called upon to pay not more than Rs 3 per share during the lifetime of
the company. In a company limited by guarantee, the liability of members is limited to such
amount as the members may undertake to contribute to the assets of the company, in the event of
it being wound up1.
3. Perpetual succession
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A company limited by a guarantee is usually meant for bon-profit organizations. The company does not have a
share capital or shareholders, but its members give an undertaking to contribute a nominal amount (typically very
small) in the event of winding up of the company.
A company is a juristic person with perpetual succession. As such it never dies; nor does its life
depend on the life of its members. It is not in any manner affected by insolvency, mental disorder
or retirement of any of its members. It is created by a process of law and can be put to an end to
only by a process of law. Members may come and go but the company can go on forever (until
dissolved). It continues to exist even if all its human members are dead. Furthermore, a
companys existence persists irrespective of the change in the composition of its members.
4. Common seal
Since a company has no physical existence, it must act through its agents and all such contracts
entered into by its agents must be under the seal of the company. The common seal acts as the
official signature of the company.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject to certain
conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to
company.
6. Separate property
As a company is a legal person distinct from its members, it is capable of owning, enjoying and
disposing of property in its own name. Although its capital and assets are contributed by its
shareholders, they are not private and joint owners of its property. The company is the real
person in which all its property is vested and by which it is controlled, managed and disposed of.
7. Capacity to sue.
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. It can
in fact do or have done to it most of the things which may be done by or to a human being.
Lifting or piercing the corporate veil
From the juristic point of view, a company is a legal person distinct from its members. This
principle may be referred to as the veil of incorporation. The effect of this principle is that
there is a fictional veil (and not a wall) between the company and its members. That is, the
company has a corporate personality which is distinct from its members.
Sometimes it becomes necessary for the Courts to break through or lift the corporate veil or
crack the shell of corporate personality and look at the persons behind the company who are the
real beneficiaries of the corporate fiction.
The various cases in which corporate veil have been lifted are as follows:
Protection of revenue
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Kinds of Companies
Classification on the basis of incorporation
1. Statutory companies
These are companies which are created by a special Act of the Legislature, e.g., the Reserve
Bank of India, the Life Insurance Corporation etc. These are mostly concerned with public
utilities, e.g., railways, tramways, gas and electricity companies and enterprises of national
importance. The provisions of the Companies Act, 1956 apply to them, if they are not
inconsistent with the provisions of the special Act under which they were formed.
2. Registered companies.
These are the companies which are formed and registered under the Companies Act, 1956, or
were registered under any of the earlier Companies Acts. These are by far the most commonly
found companies.
Classification on the basis of liability
1. Companies with limited liability
a. Companies limited by shares
Where the liability of the members of a company is limited to the amount unpaid on the
shares, such a company is known as a company limited by shares. A company limited by
shares can be a public company or a private company.
b. Companies limited by guarantee
Where the liability of the members of a company is limited to a fixed amount which the
members undertake to contribute to the assets of the company in the event of its being wound
up, the company is called a company limited by guarantee. It has a legal personality distinct
from its members.
Companies limited by guarantee are not formed for profit but for the promotion of art,
science, culture, charity, sports, commerce or some other similar purpose. They may or may
not have a share capital.
2. Unlimited companies
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Sn. 12 specifically provides that any 7 or more persons (2 or more in case of a private company)
may form an incorporated company, with or without limited liability. A company without limited
liability is known as an unlimited company. In case of such a company, every member is liable
for the debts of the company.
Classification on the basis of number of members
1. Private company
According to Sec 3(1) (iii), a private company means a company which has a minimum paid up
capital of Rs 100,000 or such higher paid up capital as may be prescribed, and by its Articles
a. Restricts the right to transfer its shares, if any. This restriction is meant to preserve the
private character of the company.
b. Limits the number of its members to 50 (now 200 under the 2013 Act) not including its
employee-members (present or past).
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of the
company.
d. Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
2. Public company
A public company means a company which
a. Has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be
prescribed;
b. Is a private company which is a subsidiary of a company which is not a private company.
Every public company, existing on the commencement of the Companies (Amendment) Act,
2000, with a paid-up Capital of less than Rs 5,00,000 shall, within a period of two years from
such commencement, enhance its paid-up capital to Rs 5,00,000.
1.
2.
3.
4.
5.
Parameter
Minimum paid-up capital
Minimum no. of persons
required to form the co.
Maximum no. of persons
Minimum no. of directors
Restriction on appointment
of directors
6. Restriction on invitation to
subscribe for shares
7. Transferability of
shares/debentures
8. Quorum
9. Managerial remuneration
Public company
Rs 5,00,000
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Private company
Rs 1,00,000
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No restrictions
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The directors must file with
the Registrar a consent to act
as directors or sign an
undertaking for their
qualification shares.
Can invite general public to
subscribe for shares in, or
debentures of the company.
The shares and debentures are
freely transferable.
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Not required
1. Government company
A Government company means any company in which not less than 51% of the paid-up share
capital is held by
a. The Central Government, or
b. Any State Government or Governments, or
c. Partly by the Central Government and partly by one or more State Governments.
2. Non-Government company
Associations not for profit
A non-profit organization in India can be registered as a Society under the Registrar of Societies,
or as a Trust, by making a Trust Deed. A third option is registering as a section 8 company under
the Companies Act 2013.
According to Sec. 13, the name of a limited company must end with the word Limited in the
case of a public company, and with the words Private Limited in the case of a private company.
Sec. 25 (now section 8) of the Act, however, permits the registration, under a license granted by
the Central Government, of an association not for profit with limited liability without using the
word Limited or the words Private Limited to its name.
The Central Government may grant license to an association where it is proved to the satisfaction
of the Central Government that it
a. Is about to be formed as a limited company for promoting commerce, science, religion,
charity or any other useful object; and
b. Intends to apply its profits, if any, or other income in promoting its objects and to prohibit
the payment of any dividend to its members.
Formation of Company
Before a company is formed, certain preliminary decisions are necessary, e.g., whether it should
be a private company or a public company, what its capital should be, and whether it is
worthwhile forming a new company or taking over the business of an already established
concern. All these decisions are taken b certain persons known as promoters. They do the entire
necessary preliminary work incidental to the formation of a company.
Availability of Name
Sn. 20 of the Companies Act provides that a company cannot be registered by a name, which in
the opinion of the Central Govt., is undesirable. So, it is advisable that promoters find out the
availability of the proposed name of the company for the Registrar of Companies (ROC) of the
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Articles of Association
The Articles of Association are the rules, regulations and bye-laws for the internal management
of the affairs of a company. They are framed with the object of carrying out the aims and objects
as set out in the Memorandum of Association.
The Articles are next in importance to the Memorandum of Association which contains the
fundamental conditions upon which alone a company is allowed to be incorporated. They are as
such subordinate to, and controlled by, the Memorandum.
In framing the Articles of a company care must be taken to see that regulations framed do not go
beyond the powers of the company itself as contemplated by the Memorandum of Association.
Contents of Articles
Articles usually contain provisions relating to the following matters:
1. Share capital, rights of shareholders, variation of these rights, payment of commissions, share
certificates.
2. Lien on shares.
3. Calls on shares.
4. Transfer of shares.
5. Transmission of shares.
6. Forfeiture of shares.
7. Conversion of shares into stock.
8. Share warrants.
9. Alteration of capital.
10. General meetings and proceedings.
11. Voting rights of members, voting and poll, proxies.
12. Directors, their appointment, remuneration, qualifications, powers and proceedings of Board
of Directors.
13. Manager.
14. Secretary.
15. Dividends and reserves.
16. Accounts, audit and borrowing powers.
17. Capitalisation of profits.
18. Winding up.
Alteration of Articles
Companies have been given very wide powers to alter their Articles. The right to alter the
Articles is so important that a company cannot in any manner, either by express provision in the
Articles or by an independent contract, deprive itself of the power to alter its Articles. Any clause
in the Articles that restricts or prohibits alteration of Articles is invalid. If, for example, the
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6. Reserve capital.
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Stocks can validly be issued only when the shares are fully paid-up. The issue of partly paid-up
stock is a nullity. This, in other words, means that only fully paid-up shares can be converted into
stock.
A company may, by ordinary resolution, convert any paid-up shares into stock; and reconvert any
stock into paid-up shares of any denomination.
The important points of distinction between shares and stocks are as follows:
1. A share has a nominal value, whereas stock has no nominal value.
2. Stock is always fully paid-up, while shares may not be so.
3. Stock is transferable in small fractions while shares can only be transferred in round
numbers.
4. All shares are of equal denomination. Stock may be of unequal amounts.
5. The faction or parts of stock do not bear any distinctive numbers while shares always bear
distinctive numbers.
6. Shares can directly be issued to the public whereas stock cannot be issued directly. Only fully
paid-up shares can be converted into stock.
As regards voting rights, the holders of the stock can vote in the same way as if the stock
represented a definite number of shares of corresponding amount taken at their nominal value.
Types of Shares
Under the Companies Act, 1956, a company can issue two types of shares preference shares
and equity shares.
1. Preference shares these have a preferential right to be paid dividend during the lifetime of
the company; and they have a preferential right to the return of capital when the company
goes into liquidation.
Cumulative preference shares are shares on which dividend goes on accumulating till it is fully
paid off. The arrears of any years dividend are carried forward as a charge upon the subsequent
years profit. For non-cumulative preference shares, the dividend does not go on accumulating.
Convertible preference shares are the shares which entitle their holder to convert them into
equity shares within a certain period. No-convertible preference shares do not confer on their
holder any such rights.
2. Equity shares are those shares which are not preference shares.
Sweat equity shares these are equity shares issued at a discount or for consideration other than
cash for providing know-how or making available rights in the nature of intellectual property
rights or value additions by whatever name called.
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The company.
Any creditor or creditors including any contingent or prospective creditor or creditors.
Any contributory2 or contributories.
All or any of the aforesaid parties, together or separately.
The Registrar.
Any person authorized by the central government under section 234.
The term contributory means every person liable to contribute to the assets of a company in the event of its being
wound up. It includes the holders of any shares which are fully paid up and includes any person alleged to be a
contributory.
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